Retalix Ltd. Q4 2007 Earnings Call Transcript

Mar.31.08 | About: Retalix Ltd. (RTLX)

Retalix Ltd. (NASDAQ:RTLX)

Q4 2007 Earnings Call

March 19, 2008 9:00 am ET

Executives

Barry Shaked – President, Chief Executive Officer and Chairman

Hugo Goldman – Executive Vice President and Chief Financial Officer

Analysts

Ehud Eisenstein – Oscar Gruss

Raghavan Sarathy – Ferris Baker Watts

[Steven Levy – IAM]

Operator

Welcome the Retalix fourth quarter and year-end 2007 results conference call.

(Operator Instructions) Leading the call is Retalix’s Chairman and CEO is Barry Shaked. Joining him is Hugo Goldman this company’s Chief Financial Officer. Before I turn the call over to them, I would like to remind our listeners that management’s remarks contain forward-looking statements.

These statements include comments regarding the guidance about revenues, net income, margins, expenses and tax rate, the company’s ability to improve cash flow and profitability and to cut expenses, product development efforts, expected increased revenues and productivity from services, reduced costs from inefficiencies and the expected cost from the depreciation of the U.S. dollar, anticipated demand for the company’s software products, expectations with regard to implementation of all of its existing license agreements, analysis of market conditions, and penetration in emerging markets, pipeline of prospective customers, anticipated rate of growth in management’s expectation as to the company’s future financial performance.

Such forward-looking statements are subject to risks and uncertainties and therefore talks, plans and protections for such statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today and we would like to refer to a more detailed discussion of all these risks and uncertainties contained in the company’s filings with the SEC and particular on Form 20-S.

Also, I would like to remind you that Retalix reports its net income and earnings per share on a both GAAP basis and on an adjusted non-GAAP basis. This presentation of net income and earnings per share will enhance our understanding of the company’s historical financial performance and will facilitate analysis of business and meaningful period-to-period comparisons.

Today’s press release includes reconciliation of non-GAAP information to the most directly comparable GAAP information and is posted in the investor section of the company’s website at www.retalix.com.

I will now turn the call over to Mr. Barry Shaked, CEO of Retalix.

Barry Shaked

While 2007 has been another record year in revenue, we did not meet our bottom line goals for the year. Today, I would like to discuss two themes with you, our current business and the initiatives we are taking to improve Retalix’s performance.

Regarding the current business, we continue to see strong demand from retailers for our solutions. We continue selling products and services and meeting the needs of our customers. Briefly, let me touch on some of the highlights for the fourth quarter.

Our new customer loyalty solution won two grocery customers in the U.S. These were expansions of our relationships with these customers, which already used our point-of-sale systems. An American grocery chain recently started using Retalix’s InSync Master Data Management (NYSEMKT:MDM) to synchronize date between the suppliers and the existing Retalix buying system.

In the U.S. we are signing new contracts for our headquarters and source solutions for small and medium grocery chains and also for our new transportation product line, which we added during 2007. Our demand for costing and ordering optimization solution index has been successfully deployed in more chains in the U.S.

In Europe an important new deal was struck with the Delhaize of Belgium, which was European’s pioneer in customer loyalty many years ago and decided to upgrade its loyalty system to the new product with Retalix Loyalty. In Italy, we completed the first stage of the rollout of Carrefour convenience stores following the successful rollout to Carrefour Hypermarkets.

In China, our third pilot store of Wumart deployed the Retalix point-of-sale solution and we are progressing in the project as planned. In Hong Kong, Park’N Shop supermarket operated by A. S. Watson went live with Retalix point-of-sale.

As you can see the business front continues to be strong, however, we understand the focus of 2008 must be on improving our performance and profitability. In the last few months we have been busy implementing a change with Retalix in order to improve our performance, our profitability and our cash flow.

Our top priority this year is not top line growth, but bottom line improvement. We have discussed this both with managers and with employees across the organization throughout the world. We are pleased by their understanding of the company objective and their commitment to make this happen in 2008.

As part of the continued effort to measure the efficiencies of our operations, we looked very carefully at our headcount. From a peak of 1,600 employees during the fourth quarter, we are now at 1,539 employees, which is a net decrease of 61 employees. We expect our ongoing right sizing will provide cost savings that will have more significant impact beginning with the second quarter.

In addition, our current efforts are largely at the following areas:

improving the utilization of professional services

prioritizing our product ability efforts

To improve our performance, we are changing how we manage the ongoing development and enhancement of products.

We believe these are an opportunity to increase service revenue. Historically, even after we released a product into the market, we continued development as part of our R&D efforts. As new products mature in the development cycle, we are reassigning resources as we are dedicated to product development to professional services.

Now we can chart customers for services connected to new products that have matured. We are tracking more closely these resources being used for services we provide to customers. This should enable us to identify and eliminate instances where the efforts do not justify the return.

In the short term these changes are reflected in more costs of services. However, we are now monitoring services’ profitability more tightly and will determine where resources should be allocated and identified. And identify opportunities to improve performance. As such, these efforts should either turn into more revenue from services or we will reduce the costs of services by eliminating the inefficiencies on those efforts that are not producing satisfactory returns.

As a result of the reassignment of resources from product development to services, the gross margins in services in the fourth quarter of 2007 was 47%. We expect to continue this trend with a similar impact in the first quarter of 2008. However, as our costs reduction measures take effect, we aim to be at a 49% gross margins for professional services for the full year of 2008.

I would also like to remind you that we will continue dedicating resources to our penetration into emerging markets even at a cost of low margins on services. According to an AMR research report released just yesterday software spending by retailers in China, India and Russia will top $1.5 billion in 2010, an increase of 45% over 2007. We believe the market potential in these emerging markets justifies our current investment.

Another step we have taken is to enhance the management of our product development. In January we appointed Isaac Shefer, Executive Vice President of Product Development. Shefer has 25 years of experience in information technology and software development. He has worked for both software development as well as for retail chains, most recently at CIO of the Israeli largest grocery chain supermarket.

Since he joined Retalix, Shefer has made significant internal changes to the development of the organization in order to focus on timely delivery of new products. We have prioritized our development efforts.

The development priority for Retalix InSync are the Master Data Management, which has been deployed to our first two customers, the InSync Purchasing module and Retalix InSync ThinStore. As these three products are released successfully during 2008, we will then evaluate the timelines for other InSync modules.

Also, we continue to invest in the development of our next generation point-of-sale and store management system, Store.Net. The first version of our new .Net series is already live in Super-Sol stores in Israel.

And now efforts are focused on the development required to take the product to global markets. We are confident that the efforts described to you today will help us to address the issues that affected our performance in the past and will help to improve our further performance.

Now, I would like Hugo to review the financials of the fourth quarter and the financial outlook for 2008.

Hugo Goldman

As we discuss with you generally the fourth quarter fell short of our expectations primarily due to a three-license deal, which we expected to close at the end of the year. These deals were expected to contribute around $8 million of licensed revenues to our product revenues line items.

Other result product revenue were 37% of revenues from the gross margin and product was 47% due to the larger share of hardware in the product revenues of this quarter. As Barry discussed, our gross marginal services is being affected by the increase of costs of services is being impacted by the increase of costs of services as part of our plan to increase the potential service revenues.

New efforts are having an impact on the gross margin on services which we expect would improve as we undertake future efficiency efforts and also allocate more of these costs to individual customers.

For the longer term, we aim to be at 49% gross margin on services. Our selling and marketing expenses in the fourth quarter were lower due to less commission and other costs savings.

General and administrative expenses were higher in the fourth quarter primarily because of some budget revamps and higher fees for legal and tax consulting.

The dipping of the U.S. dollar during the fourth quarter had a negative impact on our non-dollar wage cost, primarily in Israel amounting $1.4 million. We are monitoring the ongoing changes in currency exchange rate as in the general economy conditions and are reevaluation different options if necessary.

I am pleased with the results from December 31, 2007, our balance sheet $27.6 million in cash, cash equivalents and marketable securities in spite of the fact that we discontinued the factoring of receivables. Overall in 2007 the factoring of receivables cost us $1.8 million gross. As we are not incurring any new expenses or factoring, our financial income in the fourth quarter amounted to over $600,000.

DSO for the quarter was 128 days as we have already announced, we are giving increase in improving the receivable cycle, payment terms, invoicing, insuring debt from credit and collections. Based on our operational plans, we expect to be cash positive in 2008.

However, this is a process, so we expect the improvements of cash flow to be gradual and to come into full affect within four to six quarters. It requires time of course to work the shorter payment terms into a new contracts and to negotiate payments terms in existing engagements.

We are practically no debt. We only have long-term debt of $800,000 and our shareholder equity was $221 million.

Now looking forward to 2008, we expect a total of revenue for the full year 2008 to exceed $232 million, GAAP net income to exceed $8 million and the adjusted non-GAAP net income to exceed $15 million.

We expect a gross margin of around 51%. We expect for the development expenses to be decrease and be below 20% of total revenues. Selling and marketing expenses will be similar to 2007 at an average selling point $6 million per quarter.

G&A expenses are also expected to be similar to 2007 at an average of $6.5 million per quarter. We estimate the effective tax rate to be around [31%] of total revenues.

All the figures I have just mentioned are adjusted, non-GAAP figures which exclude amortization of intangibles or stock-based compensation expenses. Please be reminded that the compilation of to GAAP figures is available on our website at www.retalix.com.

Now I will turn the call back to Barry.

Barry Shaked

The management and the Board of Directors are focused on the initiatives that we discussed today and share the same attention to improve the performance of Retalix and insure that we deliver meaningful results for our shareholders, customers and employees.

As I am sure you have read FIMI, a well know private equity Israeli fund has recently purchased about 12% of Retalix shares. Ishay Davidi, the CEO of FIMI shares my view of the opportunity that lies ahead of Retalix. We both believe that it is in the best interest of the company to continue to pursue the end-to-end solution that Retalix is working on.

FIMI believes that it can contribute to the company’s performance and assist management in achieving better profitability. I appreciate FIMI’s interest in contributing to the company’s future. To insure that we remain focused on those goals, FIMI, Brian Cooper, the co-founder of Retalix and a member of the Board and me, recently signed a Shareholder’s Agreement.

The Shareholder’s Agreement gives the company broad and solid backing in a period of many challenges and opportunities. The Board of Directors is already moving forward with many of the points recommended in the Shareholder’s Agreement.

Yesterday, the Board of Directors approved the appointment of FIMI’s nominees, Ishay Davidi and Gillon Beck as members of the Board. I would like to take this opportunity to welcome Ishay and Gillon to the Board. I’m sure that they will contribute to the future success of Retalix.

In closing, let me discuss our outlook for 2008. The economic concerns that are being reported daily in the media are more likely to impact retailers outside Retalix markets as the consumers’ spending on food and fuel is expected to be the least affected.

The latest U.S. Census report on retailer sales, which was published last weekend, shows that sales in grocery stores grew by almost 5% in February compared to the same period last year. At the same time, sales in other retail segments such as department stores, motor vehicles, furniture and others declined in February by 4%, however we will continue to monitor the economic conditions and the outlook for the U.S. dollar.

Overall, demand for our software solutions remains strong allowing us to reconfirm the outlook we provided in January. As Hugo stated earlier, we continue to expect total revenues for the full year 2008 to exceed $232 million, GAAP net income to exceed $8 million and the adjusted non-GAAP earned net income to exceed $15 million.

As the first quarter of 2008 is nearly ended, I can update you on our performance so far this year. We expect total revenue in the first quarter to be around $54 million and non-GAAP net income to be between $0.5 million to $1 million.

Gross margins are expected to be similar to the fourth quarter as around 48%. We expect we will see these margins improve gradually during the year as our costs savings and processes of improvement will take effect.

Thank you for your attention and now we are open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Ehud Eisenstein - Oscar Gruss.

Ehud Eisenstein – Oscar Gruss

Hugo can you please go and repeat for us the ’08 model for the gross margin breakdown. It looks like you’re starting from a lower base on the product side and then you said 20% decline in R&D. Can you repeat it for us?

Hugo Goldman

Your last question is R&D so we expect R&D to be below 20% of revenues for the year, the gross margins for the year together to be 51%, product margin to be about 54%, services margin around 49%.

Ehud Eisenstein – Oscar Gruss

And, then sales and marketing and G&A?

Hugo Goldman

Sales and marketing around 15%, G&A around 11% of total revenue.

Ehud Eisenstein – Oscar Gruss

How quickly do we expect the cost to the client to decline on the sales and marketing, G&A, R&D?

Hugo Goldman

Well, basically sales and marketing we said that we expect this to be similar to 2007 and G&A to be similar to 2007. So the numbers I said earlier were $7.6 for sales and marketing and $6.5 for G&A per quarter.

Ehud Eisenstein – Oscar Gruss

Right and that’s significantly lower than 2007.

Hugo Goldman

Well, it depends. Not all the quarters were the same. So, in some cases G&A was higher later in the year. Sales and marketing was lower later in the year. So to level it out is to adjust to [inaudible] leverages in the quarter.

Ehud Eisenstein – Oscar Gruss

And the strong shekel is not helping you here obviously.

Hugo Goldman

We are looking into different options to address that issue. We are looking closely.

Ehud Eisenstein – Oscar Gruss

You feel a significant decline in working capital and I understand that some of it is related to the factoring. Can you breakdown the interests in account receivable versus the non-factoring portion of it?

Hugo Goldman

Yes. Just to give you very simple numbers that in Q4 we just did not bring in $28 million in factoring of receivables. Nevertheless, if you look at the total cash and the cash equivalent went from about $44 to $27, which is just $17 million decline.

So, just when you look at that you see we had a good quarter in terms of collections. We still need to wait over the quarters to see this to the very end. Right now the only remaining factoring we will not renew is $10 million for about the next quarter.

Ehud Eisenstein – Oscar Gruss

So, the existing factoring that you choose not to renew is not new business that goes directly to the cash flow.

Hugo Goldman

Right, we totally discontinued factoring, so what you see right now in the cash is cash solely deriving from the revenue business. It does not include the cash of $28 million adjustment to working capital. So we didn’t do that and the other [inaudible] that we got to [inaudible] to income and we don’t have to [inaudible] to our expenses.

Ehud Eisenstein – Oscar Gruss

Barry may be just a quick update on the progress in Japan, China, and other emerging territories.

Barry Shaked

We’ve been investing quite a bit of money since 2006 in these markets. We are starting to see the fruits of these investments. Actually in Japan we’re starting to be in a breakeven situation. That means we can start making profits in the future.

China, we will still be investing in 2008 to penetrate into that market, but as I mentioned, we’ve got live stores with Wumart. We expect to go live with PetroChina in June. PetroChina is kind of a landmark for other retailers to see what’s happening over there to probably adopt Retalix even more strongly.

Ehud Eisenstein – Oscar Gruss

Barry are you comfortable sharing with us the expected headcount by the end of ’08 or are you not ready yet for that?

Barry Shaked

We’re not ready for that. I’m just saying that we will continue to drive efficiency and part of that is to continue to right size the company.

Operator

The next question is from Raghavan Sarathy - Ferris Baker Watts.

Raghavan Sarathy – Ferris Baker Watts

The adjusted three-license deal that you talked about, would you refresh my memory on what led to this decision in the first place and what is a little bit on the progress since you said it would close by the end of the year?

Barry Shaked

The licenses, the three main deals are just deals that one of them the customer decided not to do anything until then will probably happen in 2008 from our point of view, which we took that into account. But I assume there will be some deals in Q4 of 2008 that will shift to 2009. Therefore, our projection remains the same.

Raghavan Sarathy – Ferris Baker Watts

This is an exception or why was the deal slipped? Is it adjusting to match the economy?

Barry Shaked

No. It’s just to do with customers making their decisions and timing, nothing more to do.

Raghavan Sarathy – Ferris Baker Watts

Hugo you mentioned, if I look at the G&A excluding the currency impact on non-cash, [expense] increased by a million, you said something like legal and obvious issues. Can you explain what led to the increase in G&A?

Hugo Goldman

I said we had some additional expenses in lawyers and tax consultants and some things, all of these expenses were higher. All together that those were the expenses were related to.

Raghavan Sarathy – Ferris Baker Watts

So, you had these one-time expenses as far as by guidance?

Hugo Goldman

Yes. I would say not exactly one time but were just some additional expenses in fourth quarter, which is not going to be there in the first quarter ’08. You should look at the others.

Raghavan Sarathy – Ferris Baker Watts

And, then in terms of the cash, again you said you’re looking roughly $6.5 million in G&A expense per quarter. Which seems to imply that you need an [inaudible] the currency impact going forward or may be a time to balance it out. How should we think on the time frame on that when the dollar seems to fall?

Hugo Goldman

So, basically we have the G&A some of it is impacted by the currency, some is not. And, that is impacted by currency we will be looking out to mitigate that through others. One of the things we will be looking at different ways of conserving or other options that we are looking into.

Raghavan Sarathy – Ferris Baker Watts

How given that you took a big hit in the fourth quarter, but your guidance informs that you spend that million in G&A expenses in the first quarter, which implies that you’re not going to see impact in currency, but you’re still looking at options.

Hugo Goldman

To explain, the $1.4 million was not just G&A, it was across the board, different line items all together. So, only a fraction was in the G&A.

Raghavan Sarathy – Ferris Baker Watts

Based on the costs you already talked about your first quarter expectations, given what we saw in the fourth quarter you brought $60 million in cash flow from operations and you only have left roughly $28 million in cash, how confident are you that you will not need additional cash going forward?

Hugo Goldman

Right now we are monitoring this very closely. We feel very comfortable with the cash levels we have, so, no issue.

Raghavan Sarathy – Ferris Baker Watts

So, assuming you’ll be cash flow positive, cash flow from operations positive starting 2008.

Hugo Goldman

For 2008, our target is to be cash flow positive, that’s true. For the based on every quarter it’s harder to say, but definitely that’s our effort.

Operator

The next question is from [Steven Levy - IAM].

[Steven Levy – IAM]

Your 2008 guidance, what shekel/dollar rate is it based upon for the full year, the $8 million dollar income.

Hugo Goldman

You are asking two questions here. One question is what was the budget we prefer and the original budget that we prefer was actually higher than the existing rate. But the other thing is that our budget is not rigid and we are also using flexible items to mitigate among others in the rate. It is something we should speak to it, definitely. It is an impact that we’re looking at how to address it, but it something you cannot know.

[Steven Levy – IAM]

What shekel/dollar rate you’re using when you gave original guidance? I understand you’re looking at guidance.

Hugo Goldman

It was 3.9.

[Steven Levy – IAM]

Since you took that original guidance have you hedged any of shekel position?

Hugo Goldman

We are monitoring that closely with a board of a different committee. We did some protection, but not much. And, we are trying to build the hedging. It takes time and we have some on the revenue side. We have some currency actually, a little bit offsetting that like the euro, etc.

[Steven Levy – IAM]

Maybe you should elaborate a bit when you’re talking about considering options. Are you talking about the actual headcount cuts? What are the options on the table to you at this point?

Hugo Goldman

We are looking at different things. One can be pricing adjustments on services, price adjustments, headcount is one more, looking more into different expenses worldwide, all kinds of contracts, etc. And again, since we have so many projects in development, we can prioritize these projects and decide to delay things to next year according to as we continue with the progress of 2008.

[Steven Levy – IAM]

Can you give us a sense of what your total exposure to the shekel in dollars?

Hugo Goldman

In general we have about more than 700 people in Israel. So, you have the people. You can do the math. Roughly, this is shekel of paid salaries.

[Steven Levy – IAM]

So you’re saying that your shekel is, I was looking for more of your net exposure here. You said you had some offset. It’s quite common I think to ask companies what their net exposure is just so you understand what the impact of the currency is. Your net exposure, can you give us a rough idea of what your shekel exposure is?

Hugo Goldman

I don’t have that number right now with me. I will be happy to talk about it later on. I just want to add for Q1 we were using already our plans what Barry mentioned about for Q1 we were using 360 so you will have a better idea.

Operator

The next question is a follow-up question from Ehud Eisenstein - Oscar Gruss.

Ehud Eisenstein – Oscar Gruss

Out of your cash and cash equivalent do you have any option rated securities or anything that you might have to impair?

Hugo Goldman

Fortunately, out of the $27 million we have $1 million in one ARF that is basically behind this [inaudible] has nothing to do with mortgages, but with corporate traded. And, because of the liquidity we had it reduced. We made it resemble $200,000 instead of the $1 million we take $800,000 in cash marketable securities.

Operator

There are no further questions at this time. I will turn over the call back to Mr. Barry Shaked.

Barry Shaked

Thank everyone for listening. And, I’ll be happy to join us on our next call in three months time.

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